North American markets plunge for a second day

North American markets sold off for a second day in a row Thursday as ongoing concerns about the pace of U.S. interest rate hikes next year was accompanied by renewed threats of a partial shutdown of the United States government.

The market expected a much more dovish outcome from the Federal Reserve so it’s adjusting to the realities that the central bank won’t have the market’s back, at least at current prices, says Mike Archibald, associate portfolio manager at AGF Investments Inc.

Sentiment also soured after U.S. President Donald Trump indicated he doesn’t want to sign a temporary funding bill unless he gets money for his signature campaign promise — a wall at the Mexican border.

“Combine that with the extremely negative sentiment that’s in the market and the sloppiness that we’ve seen over the last several weeks and it’s a recipe for another weak day,” he said in an interview.

The S&P/TSX composite index hit a two-and-a-half year low of 14,075.94, closing down 122.29 points to 14,141.77. It has lost more than 1,000 points or 6.9% in the past three weeks alone and 2,000 points so far in the year.

All sectors struggled Thursday except materials, which rose more than 2%, largely on the strength of gold.

At its peak, the price of gold gained US$23 on the day. The February gold contract was up US$11.50 at US$1,267.90 an ounce.

Gold stocks received a lift after the Fed raised interest rates.

“It hasn’t acted as a great hedge to equity market volatility in the past 12 months (but) it is starting to act a little bit more of a hedge here as we’ve seen another leg lower in equities,” said Archibald.

Health care was the worst performing sector on the TSX, falling by 2.8%, followed by technology and energy.

The energy sector fell 1.7% as the February crude contract plunged nearly five cent, losing US$2.29 to US$45.88 per barrel. That’s the lowest level since July 2017.

“I’m hesitant to say that energy’s going to go a lot lower here but we probably do need a better catalyst to get risk appetite up again,” he said.

“The outlook for Canada remains a little bit uncertain at the moment. Clearly we need oil to start working.”

The Canadian dollar hit an 18-month low, trading at an average of US74.10 ¢, down a quarter point from Wednesday.

The January natural gas contract was down US14.3¢ at US$3.58 per mmBTU and the March copper contract was down US1.95¢ at US$2.70 a pound.

Archibald says the market is expecting the Fed to raise rates just once in 2019 even though it pointed to the possibility of two hikes. He added that the Bank of Canada will also increase interest rates at most once in the back half of 2019, once it gets a better sense of Chinese tariffs in the U.S. and the implementation of the new North American Free Trade Agreement.

In New York, the Dow Jones industrial average was down 464.06 points at 22,859.60. The S&P 500 index lost 39.54 points at 2,467.42 while the Nasdaq composite was down 108.42 points at 6,528.41.

“Sentiment is obviously at extremely bearish levels so the market is setting up very well here for a counter-trend bounce and we would watch for that to happen probably into next week and into the first week of January.”